Pages

Wednesday, December 17, 2008

I had said on Monday that the Fed would bring us to 0% by the first quarter of next year. Well, you don't have to wait because they took us there yesterday.

As shocking as that was, the bigger story was the statement released by the Fed on their future actions now that we are at zero. They have announced a new form of monetary policy known as "quantitative easing." I mentioned that this would be their next step about two weeks ago, but once again they have had the audacity to come out and tell everyone their intentions.

In simple terms, they said they will be printing money and buying everything:

Mortgage SecuritiesCorporate DebtCredit DebtUS Treasuries

The most interesting in their Christmas purchase list is treasuries. They are purchasing mortgage securities in an effort to lower interest rates on mortgage lending and spur the housing market. But Treasury yields are already incredibly low? Why do they need to purchase them?

We have reached the long awaited moment when our Fed chairman is literally dumping money from helicopters. This is the most bearish possible scenario for our currency and our treasury bonds. The Fed chairman knows that we are moving closer to the point of foreigners cutting back on their purchase of our bonds. At that moment it will be the Fed alone that must stand ready to purchase our debt.

As mentioned before, if foreigners begin to diversify out of US debt that debt (money) will begin to flood back onto our shores. In combination with this flood the Fed will be hitting the country with a never ending tropical storm of dollars entering the system in the form of quantitative easing. The third storm of liquidity will come from banks who will have once again begun lending with their fresh cash the Fed has given them in exchange for their toxic debt.

All these will increase the supply of money in the system, but there is another factor just as important in the dollar's fall; demand. As seen over the past few months, the demand for dollars during the credit crisis has been voracious. This has caused an artificial rally during the current deleveraging and unwinding of the yen and dollar carry trades. However, over the past 5 trading days we've seen a change of heart in the demand for our currency, and the dollar index has dropped precipitously. (Click on chart below to see recent decline)

As the demand for dollars continues to fall, it will increase the velocity of money. This means the speed people will try to dump dollars and receive something of value in return. It will start outside our borders, but as the cost of living begins to rise rapidly here in America people will begin to buy things early in anticipation of it being much more expensive if they wait. This has the effect of intensifying the inflation.

The Feds unrelenting actions mean pretty scary times ahead for our country. We are on the verge of the greatest transfer of wealth in human history, a game of musical chairs with the last man holding the US currency out of luck. Unfortunately, that will be the American public who doesn't even know a game is being played right now with their money.

Monday, December 15, 2008

Over the past six months I have been warning of "part 2" of the housing market collapse. There were three major kinds of toxic loans made over the past 5 years, and the first one has become a household name; subprime. The other two are called Alt-A loans and Option Arms. These are time bombs waiting to reset, and thus explode, all throughout 2009 and 2010.

While I have talked about these in depth in recent discussions, the mainstream media for the most part has not paid attention to this oncoming train. The news was broken to millions last night on a 60 minutes special: (video included with link)

These loans defaulting will cause massive losses in the banking sector, which is now run by the US government. This means the losses will be paid for with tax increases, borrowed dollars from foreigners, or the printing press. All three either take money from the American public directly or do it stealthily with a loss of purchasing power.

Tomorrow our Federal Reserve meets to decide on interest rates. It is widely believed they will cut 50 basis points down to a record low .5%. I would expect to see 0% during the first quarter of next year.

Interest rates have become an after thought for the markets, however. The true question is, what will they do once interest rates reach zero? Their only weapon at that point is the printing press, and it will be locked and loaded heading into 2009.

It appears central banks around the world are all in a race to 0%. The Federal Reserve will be the first one to arrive, and they will provide the most additional "stimulus" after they get there. This will cause the dollar to lose ground against other currencies around the world, but they will all lose value when priced in gold.

"We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and but she will never sit down on a cold one either."

- Mark Twain

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait."

- Charlie Munger

"Live as if you were to die tomorrow. Learn as if you were to live forever."

- Gandhi

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I wait for a situation that is like the proverbial shooting fish in a barrel."

- Jim Rogers

"Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

- James Grant

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

- Ben Bernanke, March 2007

"Everything that needs to be said has already been said. But since no one was listening, everything must be said again."

- Andre Gide

"When people are getting richer and richer but they're not actually producing anything, it can't end well."

- Louis CK

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could."

- Rudiger Dornbusch

"I don't write about what I know. I write to find out what I know."

- Patricia Hampl

"Chains of habit are too light to be felt until they are too heavy to be broken."

- Warren Buffett

"Everyone has a plan until they get punched in the mouth."

- Mike Tyson

"Interest on the debt grows without rain."

- Yiddish Proverb

"You can have comfort, or you can have value. You cannot have both."

- Jim Grant

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

- Warren Buffett

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"Men who can both be right and sit tight are uncommon."

- Jesse Livermore

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

-Ludwig von Mises

"Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them."

- Howard Marks

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

-Mark Twain

"None are more hopelessly enslaved than those that falsely believe they are free."

-Goethe

"The longer the markets disobey basic rules of valuation, the bigger the opportunity for good investors to reap the benefits. Value investing works precisely because markets become dysfunctional at times."

-John Coumarianos

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

-Sir John Templeton

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"People only accept change in necessity and see necessity only in crisis."

-Jean Monnet

Requiring a central bank to print money to increase government's purchasing power invariably ignites a hyperinflationary firestorm. The result through history has been toppled governments and severe threats to societal stability.

- Alan Greenspan

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

- Henry Ford

"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

-Steve Jobs

"I'd be a bum on the street with a tin cup if the markets were always efficient."

-Warren Buffett

"The market can stay irrational longer than the investor can stay solvent."

- Keynes

"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

-Ayn Rand, 1974

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

- F. Scott Fitzgerald

"All our life, so far as it has definite form, is but a mass of habits - practical, emotional, and intellectual - systemically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter may be."

-William James

"Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

- Stephen Hawkings

"Give me control of a nations money supply, and I care not who makes it's laws."

- Amschel Rothchild

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

- Sigmund Freud

Many of life's failures are people who did not realize how close they were to success when they gave up.